Shares surge nearly 2 per cent

Buoyed by global sentiment, Australian shares posted their biggest advance in three months despite a shock fall in retail sales.

The benchmark S&P/ASX200 added 89.6 points or 1.95 per cent to 4676.2, its biggest single day climb since September 1. Only 21 stocks lost ground as all sectors advanced, led by utilities, materials, information technology and energy.

The broader All Ordinaries rose 85 points to 4761.8 while the Small Ordinaries added 45 points to 2747.5.

Regional peers were buoyant as Japan’s Nikkei rose 1.81 per cent to 10,168.69, Hong Kong’s Hang Seng added 0.9 per cent to 23,458.74 and China’s Shanghai Composite gained 1.6 per cent to 2868.49, having taken the lead from Wall Street’s S&P 500, which added 2.16 per cent, London’s FTSE 100 rose 2.07 per cent, while Germany’s DAX added 2.66 per cent.

US private employers added 93,000 jobs in November, above consensus estimates, which boosted optimism towards Friday’s jobs report, while the US manufacturing sector expanded for a 16th consecutive month in November. The Institute of Supply Management said its purchasing managers index stood at 56.6 per cent, ahead of expectations at 56.5 per cent.

Domestically, retail sales unexpectedly fell for the first time in eight months after higher interest rates filtered through to curb spending. Retail sales shed 1.1 per cent in October, against an expected 0.4 per cent gain. Clothing, footwear and personal accessory retailing fell the most while household goods and department stores also retreated in trend terms.

Zurich Investments senior investment specialist Patrick Noble said the trend had been there for some time, flagged in Wednesday’s household savings rate, which was in excess of 10 per cent.

“Aussie households had been reigning in their expenditure, battering down the hatches and been jawboned into expecting interest rate rises.”

Mr Noble said the data was visibly impacted by factors such as pervasive increases in utilities costs and a higher $A leading to more online shopping.

“The big department stores are still doing okay but the best data you’ll get for them moving forward is how they fare through Christmas and summer sales,” he said, still uncertain if it would be a ‘scrooge Christmas’ or if high levels of savings in a mid-cycle slowdown would mean increased spending in the new year.

Mr Noble said Zurich was not diving into a cyclical retail recovery in its portfolio, noting there was better value in other areas of the market.

“If you’ve waited this long, you may as well wait another month or two for guidance or sales results in the new year.”

He said the retail sector was not screaming value but gave validity to the argument of others with a more glass half full approach who suggested investors could take advantage of the lacklustre outlook facing the sector.

Clime Investment Management chief investment officer John Abernethy said the fear of increases in interest rates had a dramatic effect on the patterns of consumption of average wage earnings with mortgage debt.

“Another effect is an aging population, people moving towards retirement are saving and are clearly pulling back on consumption of discretionary goods, and that’s going to be a feature throughout the next decade, that’s a long cycle that peaks in 2015.”

Mr Abernethy noted the migration to online sales may not have been captured in the retail sales figures.

“You can focus on retailers who either won’t be impacted by online or are servicing people with essentials and are at the right price points, the staples are great.”

Additionally, Mr Abernethy suggested landlords of retailers - such as Westfield - would come under continual pressure to hold rents down in an environment of deflation, weak growth in retail sales and the attack of online competition. Westfield rose 17¢ to $12.25.

Another factor affecting the retail sector has been the strength of the $A. Credit Suisse notes that the stronger Aussie dollar typically provides a significant boost to domestic discretionary retail EPS through margins and the underlying drivers of revenue.

However, he said this is not occurring in the current environment. The broker said retailers were discounting away currency benefits, given their use of an unprecedented level of discounting. Analysts added that retailers were not experiencing a significant volumes benefit and certain retailers would find it difficult to maintain margins should the $A decline. Credit Suisse noted that margins did not materially decline when the $A retreated in 2009 due to the government’s stimulus package.

Among the miners, BHP Billiton added the most points to the index, up $1.13 to $44.33, Rio Tinto rose $1.91 to $85.01 while Newcrest Mining added 71¢ to $40.40.

A number of the smaller and mid cap resources stocks achieved 52-week or period highs, including Saracen Mineral Holdings, Mantra Resources, Atlas Iron, Summit Resources, and Ramelius Resources.

Mining services company Ausdrill also hit a 52-week high, up 11¢ to $2.66 while elsewhere in the sector, UBS upgraded Fleetwood Corporation to “buy” from “neutral”, helping it add 37¢ to $12.40. Emeco added 3¢ to 97¢.

The banks were buoyant as Commonwealth Bank of Australia rose 78¢ to $49.30, Westpac rose 51¢ to $21.96, ANZ Banking Group rose 77¢ to $23.42 and National Australia Bank added 61¢ to $23.91.

Telecommunications stalwart Telstra added 3¢ to $2.82.

Elsewhere, Nufarm rose 16¢ to $4.80 after flagging an improved result for the half-year compared with the first six months of 2010, in which it recorded a headline loss of $40 million and an operating loss of $4.5 million.